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1.1 INTRODUCTION1.2 ORIGIN OF BANKS1.3 MEANING AND DEFINITIONS OF BANK1.4 FUNCTIONS OF BANKS1.5 IMPORTANCE OF BANKS1.6 STRUCTURE OF INDIAN BANKING SYSTEM
1.6.1 Reserve Bank of India (RBI)1.6.2 Scheduled Banks1.6.3 Non-Scheduled Banks1.6.4 Commercial Banks1.6.5 Co-operative Banks1.6.6 Regional Rural Banks1.6.7 Foreign Banks in India1.6.8 Public Sector Banks1.6.9 Private Sector Banks
1.7 TOP TEN INDIAN BANKING COMPANIES DURING 2008-09REFERENCES
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11..11 IINNTTRROODDUUCCTTIIOONN
Trade is the calm health of nations.
Credit is its lifeblood.Money is its nerve system.
Trade originated in barter between primitive peoples. The first property
was communal owned by a group or a tribe. Personal property developed
out of individual possession of ornaments, usually stones or shells that
gave them a quality of decoration. The possessor of such property could
exchange it for articles of utility, and this gave rise to individual barter andindividual wealth. This principle of barter next extended itself to exchange
between groups or tribes each of which had a surplus of useful things
desired by the other.
Primitive Barter necessitated physical exchange of the things. This
exchange became burdensome and impossible if not been relieved by a
transfer of evidence of value a medium of exchange which in itself was not
wealth, but a token of wealth. That was the beginning of money.
Wealth consists in things that have inherent utility. Land is useful,
therefore it is wealth. A deed to land is only an evidence of ownership of
land; therefore in itself it is not wealth. A gold coin is wealth only in so far
as the metal it contains has a value of utility.
A man may be called a billionaire, and yet have very little money. Hisrating rests upon ownership or control of useful property, whether land,
tools or goods. The wealth of the world could not possibly be represented
by actual money. Exchanges of it could not be carried on through
accompanying transfers of actual money. Money is the active principle the
nerve center of credit. Banking grew out of the necessities of credit in
exchange. The growth was forced, and slow.
The first banking system in known history was perfected about twelve thousand
years ago, in the empire that preceded the Assyrian.
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Banking has enabled a ten-fold increase in general production, and set up
that machinery of exchange without which industry and commerce would
stagnate in a week. It has enabled those groupings of industry by which
production costs and selling prices have in so many familiar cases put basic
necessaries into the hands of all the people.
To quote a valuable book by Earl Dean Howard and Dr. Joseph French
Johnson: "Money is an instrument and banking an institution to assist
production of wealth and thereby increase the material welfare of the
people by facilitating the indispensable operations of exchange without
which all other productive effort would have but a fraction of its efficacy,without which we would still be in a state of industrial barbarism."
Banking, in its crude form, is an age-old phenomenon. It was in existence
even in ancient times. In India, the references to money-lending business
are found in the Manu Smriti. Chaldean, Egyptian and Phoenician history
also records the existence of rudimentary banking in early days.
Prof. Marshall in his book,Money, Credit and Commerce, (1923) writes about
the activities of money-changers in the temples of Olympia and other
sacred places in Greece, around 2,000 B.C. To quote him, Private money-
changers began with the task of reducing many metallic currencies, to a
common unit of value, and even to accept money on deposit at interest,
and to lend it out at higher interest permitting meanwhile drafts to be
drawn on them. As a matter of fact, the origin of banking lies in the
business of money changing in ancient days.
Crowther, speaks about three ancestors of a modern commercial bank, viz.,
the merchant, the money-lender and the goldsmith. The merchants or
traders issued documents like hundi to remit the funds. Modern banks
introduced cheques or demand drafts for remittance purposes. Money-
lenders gave loans. Bankers too gave loans. Goldsmiths received deposits
and created credit. Banks also received deposits and adopted the process of
credit in a similar fashion, by issuing cheques. In short, the evolution of
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commercial banking is related to the practice of safe-keeping of gold and
other valuables with merchants/goldsmiths/ money-lenders.
Etymologically, however, the word bank is derived from the Greek word
banque, or the Italian word banco both meaning a bench referring to a
bench at which money-lenders and money-changers used to display their
coins and transact business in the market place.
In India, however, modern banking started when the English agency
houses in Kolkata and Mumbai began to serve as bankers to the East India
Company and the Hindustan Bank was the first banking institution of its
kind to be established in 1779.
11..22 OORRIIGGIINN OOFF BBAANNKKSS
There is no unanimity among the economists about the origin of the word
Bank. The word bank is itself derived from the Greek word banque i.e.,
a bench. The ancient meaning of bank related with the money changers by
the persons seating on benches. Peoples can change their money from thesepersons. They had funds of different currencies and can change any
currency in another currency as required by the businessman. Afterwards
the word bank was used in the sense of credit. As the second opinion the
word bank was developed from the German word banck. The word
banck means a joint stock firm.
Banking is as old as is the authentic history and origins of moderncommercial banking are traceable in ancient time. The new testament
mentions about the activities of the money changers in the temples of
Jerusalem.
In ancient Greece around 2000 B.C. the famous temples of Ephesus, Delphi
and Olympia were used as depositories fir peoples surplus funds and
these temples were the centres of money-lending transactions. The priests
of these great temples acted as the financial agents until public confidence
was destroyed by the spread of disbelief in the religion. Traces of credit by
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compensation and by transfer orders are found in Assyria, Phoenicia and
Egypt before the system attained full development in Greece and Rome.
In India, the ancient Hindu scriptures refer to the money-lending activities
in Vedic period. During the Ramayana and Mahabharata period, banking
had become a full fledged business. The Vaishyas community earns
interest by lending money. They performed most of those functions which
banks perform in modern times.
As a public enterprise, banking made its first beginning around the middle
of the twelfth century in Italy. The Bank of Venice, founded in 1157, was
the first public banking institution. After its establishment, were
established the Bank of Barcelona and the Bank of Genoa in 1401 and
1407 respectively. Apart from these banks, the famous Bank of
Amsterdam was established in 1609 in Holland and it enjoyed a
prestigious position for a long time in the sphere of international
commerce. In the year 1694 the Bank of England was established. Modern
banking was started with the establishment of the Bank of Amsterdam.The Bank of England is the oldest unit of modern banking.
Joint stock companies had entered in the banking sector in eighteenth
century. The Banking Act of 1833 had opened the way of establishment of
joint stock banks. While banking arose far early and more rapidly in some
countries, it was only in the nineteenth century that the modern joint stock
commercial banking system developed in the leading countries of the
world.
11..33 MMEEAANNIINNGG AANNDD DDEEFFIINNIITTIIOONNSS OOFF BBAANNKK
You know people earn money to meet their day-to-day expenses on food,
clothing, education of children, housing, etc. and to meet future expenses
on marriage, higher education of children, house building and other social
functions. These are heavy expenses, which can be met if some money is
saved out of the present income. Saving of money is also necessary for old
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age and ill health when it may not be possible for people to work and earn
their living.
The necessity of saving money was felt by people even in olden days. They
used to hoard money in their homes. With this practice, savings were
available for use whenever needed, but it also involved the risk of loss by
theft, robbery and other accidents. Thus, people were in need of a place
where money could be saved safely and would be available when
required.
Banks are places where people can deposit their savings with the assurance
that they will be able to withdraw money whenever required. People who
wish to borrow money for business or other purposes can also get loans
from the banks.
A bank is a person who carries on the business of banking, which is:
conducting current accounts for customers
paying cheques drawn on him, and
collecting cheques for his customers.
Bank is a lawful organisation, which accepts deposits that can be
withdrawn on demand. It also lends money to individuals and
business houses that need it.
A Bank is an institution which accepts deposits from the general public
and extends loans to the households, the firms and the government. Banksare those institutions which operate in money. Thus, they are money-
traders. With the process of development, functions of banks are also
increasing and diversifying. Now, the banks are not nearly the traders of
money, they also create credit. Their activities are increasing and
diversifying. Hence, it is very difficult to give a universally acceptable
definition of bank. The important definitions of bank are as follows given
on different bases:
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(A) Definitions given in Dictionaries:
In different dictionaries bank has been defined in different ways:-
(1) Websters Dictionary:Bank is an institution which trades in money,establishment for the deposit, custody and issue of money, as also for
making loans and discounts and facilitating the transmission of
remittances from one place to another.
(2) Oxford Dictionary: Bank is an establishment for custody of money
received from or on behalf of its customers. Its essential duty is to pay
their drafts on it. Its profits arise from the use of the money left
employed by them.
(B) Definitions under Laws of Different Countries or LegalMeaning of Bank:Legal definitions of Bank under different laws are as follows:-
(1) Indian Banking Regulation Act, 1949:Banking Company is one whodoes banking business. Banking business means to accepting for thepurpose of lending or investment of deposits of money from the
public repayable on demand or otherwise and withdrawable by
cheque, draft order or otherwise.
(2) American Federal Acthas defined State Bank as, any bank, banking
federation, trust company, saving bank (excluding mutual banks) or
other institutions who engaged in the business of accepting deposits
and incorporated under any state law.
(C) Definitions on the basis of views of scholars:
The economist defined the term bank are discussed below:-
(1) According to Prof. Kinley:A bank is an establishment which makesto individuals such advances of money or other means of payment as
may be required and safely made; and to which individuals entrust
money or means of payment when not required by them for use.
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(2) According to Prof. R.S. Sayers: Banks are institutions, whose debts
usually referred to as bank deposits are commonly accepted in final
settlement of other peoples debts. In other words, Bankers are not
merely traders in money but also in important sense manufacturers of
money.
(3) According to Prof. Findaly Shirras: A banker is a person, firm or
company, having place of business where credits are opened by the
deposits or collection of money or currency, subject to be paid or
remitted upon draft, cheque or order when money is advanced or
loaned on stock, bonds, bullion, bill of exchange and promissory noteare received for discount or sale.
The most suitable definition of the bank is A bank is an institution which
deals in money and credit.When we say that the bank deals in money and
credit, what we mean is that the bank buys and sells money and credit. By
sale of money, what is meant is the giving of loans. Likewise, by purchase
of money, we mean borrowing money from others. In both the situations,
the price of money is paid in the form of interest.
11..44 FFUUNNCCTTIIOONNSS OOFF BBAANNKKSS
Banks not only deals in money and credit, but also they perform large ###
variety of functions such as agency functions, credit creation and general
service. Here we use the meaning of modern banks in a narrow sense as
commercial banks. Following are the main functions of Commercial Banks
or Modern Banks:-
(a)Primary or Traditional Functions.
(b)Agency or Representative Functions.
(c)General Utility Functions.
(d)Financial and Managerial Arrangement for Foreign Trade.
(e)Function of Credit Creation.
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Functions of Banks
Figure 1.1
(A) (B) (C) (D) (E)
1. Accepting Deposits:(i) Fixed Deposit A/c(ii) Current Account(iii) Savings Bank A/c(iv) Other Accounts
2. Advancing of Loans
(i) Cash Credit(ii) Loans & Advances(iii) Overdraft(iv) Discounting of
Bills of Exchange
1. Collection of chequesand bills
2. Payment of cheques andbills
3. Collecting payment onbehalf of customers
4. Remittance facilities
5. Purchase and Sales ofsecurities
6. Trustee and Executor7. Underwriting Function8. Other Agency Functions
1. Safe custody of valuables2. Issuing of Travellers
cheques3. Information about
customers4. Financial Advisor5. Publication of Statistics
6. Accepting Bills ofExchange
7. Guaranteer of Loans8. Providing Consumer
Loans9. Arrangement of Public
Debts10. Foreign Exchange
Transactions
Primary orTraditionalFunctions
Agency orRepresentative
Functions
General UtilityFunctions
Financial &Managerial
Arrangement forForeign Trade
CreditCreation
Functions of Banks
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(A) Primary or Traditional Functions:
The primary functions of modern banks are as follows:
1. Accepting Deposits: The main function of a commercial bank is to
accept deposits from the public and providing loans. Banks required
money for providing loans. Their share capital does not create
sufficient funds for providing loans. Therefore, banks accept deposits
from the persons or institutions and pay interest to the depositors.
Persons or institutions deposit their surplus funds with banks for the
purpose of earning of interest and safety of funds. Banks play the
reasonable interests on the deposits. The bank not only undertakes to
take care of the deposit but also agree to honour the demands of the
depositors from withdrawal of money from the deposit. The bank
generally accept deposit by the way of opening following accounts:
(i) Fixed Deposit Account: This is also known as term deposit or time
deposit account. Money in this account is accepted for a fixed period,
say one, two or ten years. The money so deposited cannot be
withdrawn before the maturity period or the expiry of the fixed time.
The rate of interest on this account is higher than that on other
accounts and varies according to the period of deposit. It matures at a
definite date. If a depositor withdraws this amount before the
maturity period, he entails an interest penalty. Thus, bank can fully
use this amount for a certain period.(ii) Current Account: This is also known as demand deposit or current
deposit. The depositor can withdraw the money from this account
whenever he requires it. Generally, the bank grants no interest on this
account because it has to keep the cash ready all the time to meet the
requirement of the depositors. This account is generally opened by
businessman, companies, institutions and Government, who may
have to withdraw money several times in a day. In the case of current
account bank has to pay off the debt on demand either to the
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depositor himself or to anyone else whom he authorizes by writing a
cheque. Bank cannot use this money freely, so he does not pay any
interest on current account deposits. The amount deposited in current
account is the debt of the bank. Overdraft facilities are also available
on current account.
(iii) Savings Bank Account: This type of account is generally opened by
small and middle income group persons. They deposit their small
savings in this account and earn interest. By depositing their small
savings they also help in capital formation. Deposits in this account
earn interest at nominal rates, as the banks can always be called upon
by a depositor to release his amount. In practice, the bank imposes a
limit on the number and amount of withdrawals during a particular
period. The depositors are also given cheque facility to withdraw
money from this account.
(iv) Other Accounts: Banks are also providing deposit facilities to
different type of customers by opening different accounts. They also
open Home Safe Account for housewife or very small savers. The
other accounts are: Indefinite Period Deposit Account, Recurring
Deposit Account, Daily Saving Deposit Account, Retirement Scheme,
Monthly Income Scheme, Minor Saving Account, Formers Deposit
Account, Home Deposit Account, Accounts related to Insurance
benefits etc.
2. Advancing of Loans: The important function of commercial bank is
advancing loans to their customers. The bank received deposit by
different ways and pay interest on the deposits. Bank grant loan from
this amount and charge interests at a higher rate. These loans are
generally granted to traders, industrialists, farmers and self-employed
persons. Generally, bank sanctions following type of loans and
advanced:
(i) Cash Credit: In this system bank advances loans on the basis of
security of shares, debentures, other securities and tangible assets. It
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may also be based on the promissory notes of the borrowers. In cash
credit banks grant loans and deposit it in the borrowers account. The
borrower can withdraw this amount at any time and interest is
charged on the used amount. Under this type of loan, borrower
withdraw sum of money according to his requirements but he cannot
exceed the credit limit sanctioned to him. When the borrower
mortgage goods (stock) kept in the godown, the godown remains in
the possession of the bank.
(ii) Loans and Advances: Here the bank gives a specified sum of money
to a person or a firm against some collateral security. The loan money
is credited to the account of the borrower and the borrower can
withdraw loan amount according to his requirements. The borrower
has to pay interest on the entire amount of loan from the date of
sanctioning of loan to the date of repayment. If borrower fails to
repay the loan, its collateral security can be sold by the bank in the
market and recover his loan amount.
(iii) Overdraft: Commercial banks also allow a customer to draw cheques
for a sum which is greater than the balance lying in his account. This
is known as overdraft facility which can be allowed upto an agreed
limit. In the case of overdraft, a customer pays interest on the amount
by which his current account is actually overdrawn. He does not have
to pay interest on the entire amount of overdraft sanctioned to him by
the bank. This facility is granted against some collateral security for
short period.
(iv) Discounting of Bills of Exchange: Banks also lend money by
discounting bills of exchange. In case the holder of a bill needs money
immediately, he can get his bills discounted by a bank. The bank
charges a commission for discounting of bills. When the bill matures,
the bank can get payment directly from the banker of the debtor who
originally accepted the bill.
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(B) Agency or Representative Functions:
The bank performs various agency functions or services for its customers.
For these services, the bank charges commission from its customers. A few
services are rendered by the bank to its customer free of charge.
The various agency services rendered by the bank are as follows:
1. Collection of Cheques, Bills of Exchange and other Credit
Instruments: Bank collects the payment of cheques, bills of exchange or
other credit instruments on behalf of its customers from other banks
and credit it in their accounts. Generally, this service is rendered free of
charge but on outstation credit instruments, bank charges nominal fees.
2. Making Payment of Cheque, Bill of Exchange etc.: Commercial banks
perform the function of making payments of cheque, bills of exchange
etc. Bank pay insurance premium, rent, subscriptions etc. on behalf of
their customers and debit their account. Banks also accept bills of
exchange on behalf of their customers and make payment on due date.
3. Collecting dividends, interest etc. on shares and debentures of the
customers: The bank collects dividends and interests paid by the
companies on shares and debentures on behalf of their customers and
credit it in their account.
4. Remittance Facilities: On request of the customer, bank helps in
transferring funds from one place to another through bank drafts,
cheques, and mail transfers. Bank charges fee for its services.
5. Purchase and Sale of Security: Bank purchases and sells securities in
the share market on order and on behalf of its customers. They charge
appropriate commission for their services.
6. Trustee and Executor: Banks also acts as a trustee, executor,
administrator and attorney. As a trustee, bank takes care of the assets
of the customers. It also helps in the administration of the trust. As an
executor the bank preserves the wills of the customers and execute it
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as per the desire of the customer. As an attorney, the bank signs
transfer forms and documents on behalf of the customer.
7. Underwriting Function: Bank also execute the function of
underwriting shares, debentures, bonds and other securities issued by
the public limited company or Government. Bank provide guarantee of
minimum funds to the company. The underwriting function of bank
creates public confidence in the working of companies. Bank charges
commission for underwriting services.
8. Other agency functions: The bank also acts as an agent, representative
or correspondent of customers. The bank may obtain passports,travellers tickets and even secure air tickets for its customers.
(C) General Utility Functions:
Bank also provides following general utility services to its customers:
1. Safe custody of valuable goods: The bank provides locker facilities to
its customers for safekeeping of their valuables like shares and
debentures certificates, gold ornaments, documents etc. Bank charges
annual rent for providing lockers.
2. Issuing of Travellers Cheques etc.: The bank also issues travellers
cheques or circular letters of credit for the benefit of its customers.
Customer can obtain certain amount at a certain place by presenting
travellers cheque. Thus, customers may free from the problems of
keeping cash with them.
3. Giving Information about its Customers: Since the bank is closely
acquainted with its customers, it can pass on reliable information about
their credit-worthiness to other concerned parties at other places. The
banks information is considered as reliable. It reduces risk and helps in
explanation of trade and business.
4. Financial Advisor: Since the bank is fully acquainted with the
economic situation in the country, it is in a position to render useful
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advice to its customers on financial matters. This helps the customer in
taking appropriate decisions.
5. Publication of Statistics: Large commercial bank collects statistics
about money, banking, trade and commerce and publishes them. They
present the analysis of these economic statistics which helps in
economic and business decisions.
6. Accepting Bills of Exchange: The banks accept exchange bills on
behalf of their customers. This benefits the customers because when the
bank signifies its acceptance on the exchange bill, it becomes readily
discountable in the money market.
7. Guaranteer of Loans: Commercial banks act as guarantor of the loans
of industrial and business houses granted by National and
International Financial Institutions, and thus help to get loans easily.
8. Providing Consumer Loan: Commercial banks grant consumer loan to
their customers on their personal credit, for purchasing of consumer
article such as Television, Refrigerator, Scooter etc. and can be repaid ineasily installments.
9. Arrangement of Public Debts: Commercial banks help in selling of
securities issued by the Government as an agent of RBI.
10. Foreign Exchange Transactions: Some commercial banks also take the
responsibility of foreign exchange transactions and have a separate for
this purpose.
(D) Financial and Managerial Arrangement for Foreign Trade:
Commercial banks have played an important role in the expansion of
foreign trade. They make available short term credit to the traders
engaged in foreign trade and undertake the functioning of acceptance and
discounting of bills, hundies and letter of credit. These banks also take the
task of establishing mutual relationship between exporters and importers.
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(E) Credit Creation:
Commercial banks undertake the function of credit creation according to
the credit policy of Reserve Bank of India. Granting of loans and advances
is an important function of the bank. As we know, when the bank grants
loans to its customers, it generally does not lend out cash, equal to the
amount of the loan, to the customer as an individual money-lender does,
but on the contrary, opens an account in his (borrowers) name and credits
the amount of the loan to his account. Thus, whenever a bank grants a
loan, it creates a deposit or a liability against itself, which leads to a net
increase in the money stock of the economy. This is known as creation ofcredit or money by the bank.
11..55 IIMMPPOORRTTAANNCCEE OOFF BBAANNKKSS
Banks play very important role in the economic life of the nation. The
health of the economy is closely related to the soundness of its banking
system. Banks are essential for all type of economic systems whether they
are developed or developing. No developing country can progress
without setting a sound system of banking in the country. Although banks
create no new wealth but their borrowing, lending and related activities
facilitates the process of production, distribution, exchange and
consumption of wealth.
In this way they become very effective partners in the process of economic
development. Today, modern banks are very useful for the utilization of
the resources of the country. The banks are mobilizing the savings of the
people for the investment purposes. The savings are encouraged and
saving rate increases. If there would be no banks then a great portion of a
capital of the country would remain idle.
A bank as a matter of fact is just like a heart in the economic structure and
the capital provided by it is like blood in it. As long as blood is in
circulation the organs will remain sound and healthy. If the blood is not
supplied to any organ then that part would become useless. The
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importance of a sound system of banking for a developing country may be
depicted as follows:
1. Promotion of Saving: The basic function of commercial banks is to
mobilize the savings of the community and to utilize it in productive
investment. By accepting deposits banks promote the habit of thrift and
saving in the society. People collect their small savings and deposit it in
the bank to earn interest. These small savings later result in capital
formation in the country.
2. Capital formation: By encouraging savings among the people, banks
promote capital formation which is the basis of economic developmentof the country. These savings are used to provide loans to industries
and business. Commercial banks also create credit. This credit and
finance works as capital to the industries. Thus, by collecting small
savings banks help in capital formation and ultimately in the economic
development of the country.
3. Financing for Trade and Industries: The banks also encourage
industrial development and business expansion by providing funds to
entrepreneurs. Modern industries require a huge amount of capital.
They cannot run without sufficient capital. Commercial banks have to
finance small and large industries by giving term loans. Banks collect
scattered small saving in the society and utilize this amount by giving
loans to industries, business and Government. They also help in
increasing productivity of capital by providing funds to theentrepreneurs.
4. Mobility of Capital: Capital is the main factor for developing modern
lines of production. Commercial banks mobilize the dormant capital of
the country for production purposes. Commercial banks can contribute
to capital mobilization by investing capital in more useful places than
less productive places. Thus, by mobilizing capital they contribute in
increasing production, employment, national income and economic
development of the country.
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5. Flexibility of Monetary System and Price Stability: Banks regulate the
supply of money in an economy through credit creation. Price stability
can be maintained by balancing between the demand and supply of
money. Thus, banks help in price stabilizing and in maintaining
flexibility in monetary system.
6. Remittance facility: Banks help in remitting money from one place to
another. Remittance facilities provided by the banks help in promoting
national and international trade. It also reduces business risk and
transfer of money cost.
7. Helps in Public Finance: Banks play an important role in collecting
funds through public debts. They also act as a financial advisor and
financier to the Government, when needed. Profits of public sector
banks are used as a source of public finance. They collect fund through
selling Government security to the public.
8. Employment Generation: Banks help in development and expansion
of industrial and business activities. They have opened the vista of
development in the country. With the growth of industrial, businessand banking activities employment opportunities in the country has
increased to a considerable extent.
9. Finance for priority sectors: In an underdeveloped economy,
commercial banks hesitate in extending financial accommodation to the
priority sectors such as agriculture, small scale industries on account of
the risks involved therein. They mostly extend credits to trade and
commerce where the risk involved is far less. But for the development
of these countries it is essential that banks take risks in extending credit
facilities to the priority sectors. Nationalised commercial banks are
doing this job successfully.
10. Innovations: Innovations are an essential prerequisite for economic
development. These innovations required financial facilities. In
developed countries, banks extend credit facilities for innovations. Butthe entrepreneurs in developing countries cannot bring about these
innovations due to lack of adequate bank credit. The banks should,
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therefore, pay special attention to the financing of business innovations
in developing countries by extending cheap credit to the entrepreneurs.
11. Promotion of Sound Banking System: A sound banking system is
essential for the economic development of a developing country. Bank
helps in promotion of banking trends in public. With the development
of banking activities, cheques and drafts are being used in transactions.
It reduced the requirement of coins and currency in circulation.
12. Balanced Regional Development: Banks help in proper allocation of
funds among different regions of the country and thus help in balanced
regional development. Now, banks have stared acting as powerful
agents of growth. In this role, they do not follow economic
development rather banks create the infrastructure essential for
economic development. Thus, banks can act as engines of balanced
regional development in the country.
13. Expansion of Markets: Banks help in the expansion of markets
through extending funds for large scale production. Commercial banks
encouraged business activities in a number of ways, e.g., act as anintermediary, accepting bills of exchange, issuing of letter of credit etc.
The presence of banks makes it possible for commerce and industry to
extend their area of operation.
14. Developing Entrepreneurs: Banks have assumed the role of
developing entrepreneurs especially in developing countries. This role
is being effectively played by underwriting new scrips, by granting
assistance either as mentor for promoting new ventures or financing
promotional activities under the joint guarantee system.
Thus, commercial banks can play a useful role in promoting the economic
development of an economy. Banks lending and investment activities
lead to changes in the quantity of money in circulation which in turn
influence the nature and quality of production. Therefore, commercial
banks have been rightly crowned as the nerve centre of all economicactivity. In fact, the economic development of a country is not possible
without a sound system of commercial banking.
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11..66 SSTTRRUUCCTTUURREE OOFF IINNDDIIAANN BBAANNKKIINNGG SSYYSSTTEEMM
The banks play a stellar role in the development of the nation with its high
social content and commitment. The banks act as a development agency
and are the source of hope and aspirations of the masses. Banking and
finance is like oxygen to any democracy. The structure of the banking
system is determined by two basic factors economic and legal. The
development of the economy and the spread of banking habit calls for
increasing banking services. The demand for these banking services affects
the banks structure and organisation. National objectives and aspirations
result in government regulations, which have a profound influence on the
banking structure. These regulations are basically of two types
(i) First, regulations which result in the formation of new banks to
meet the specific needs of a group of economic activities and
(ii) Secondly, legislation that affects the structure by means of
nationalisation, mergers or liquidation.
It is no exception in case of India as banking is one of the most heavily
regulated businesses in the world. The Indian banking system has come
from a long way from being a sleepy business institution to a highly
proactive and dynamic entity. Indian economy is having a vibrant
banking sector, powered by both improved-efficiency public sector banks
and growth-hungry private ones.
Banking Segment in India functions under the umbrella of Reserve Bank
of India - the regulatory, central bank. India follows a bank-based financial
system with a multilayered network consisting of scheduled and non-
scheduled banks. These scheduled and non-scheduled banks functions
under different categories consisting of: large state-owned banks, old
private banks, new private banks, foreign banks, regional rural banks,
cooperative banks, non-banking finance companies (NBFCs) anddevelopment financial institutions.
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Structure of Indian Banking System (As on 31st October, 2006)
Figure 1.2
Note: Figures in parentheses indicate number of banks in each group.Source: Reserve Bank of India, Report on Trend and Progress of Banking in India, various issues.
RESERVE BANK OF INDIA[Central Bank and Supreme Monetary Authority]
SCHEDULED BANK NON-SCHEDULED BANKS
COMMERCIAL
BANKS [186]CO-OPERATIVE
BANKS [86]
REGIONALRURALBANKS
[102]
PRIVATESECTORBANKS
[27]
PUBLICSECTORBANKS
28
FOREIGNBANKS IN
INDIA[29]
SCHEDULEDURBAN
COOPERATIVEBANKS [55]
SCHEDULEDSTATE
COOPERATIVEBANKS [31]
STATE BANK OFINDIA AND ITS
ASSOCIATES [08]
NATIONALISEDBANKS
[19]
OTHER PUBLICSECTOR BANK
[ IDBI ]
OLDPRIVATE
BANKS [19]
NEWPRIVATE
BANKS [08]
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The viable banking structure, extremely useful and indispensable, playing
a substantial role in the growth of Indian economy is shown in
Figure 1.2.
1.6.1 Reserve Bank of India (RBI)
A bank which is entrusted with the functions of guiding and regulating
the banking system of a country is known as its Central bank. Such a bank
does not deal with the general public. Indias central bank is the
Reserve Bank of India. Reserve Bank of India (RBI), was established on
April 1, 1935 in accordance with the provisions of the Reserve Bank of
India Act, 1934. Though initially RBI was privately owned, it was
nationalized on January 1, 1949.
The RBI is the apex monetary institution in the money market which acts
as the monetary authority of the country. The RBI is an organ of the
government which, by reason of its operations, influences the working of
financial institutions of the country. In India, the R performs the functions
as depicted in Figure - 1.3.
Functions of Reserve Bank of India
Figure 1.3
ControlBankingSystem
IssueCurrency
Notes
ExecuteMonetary
Policy
Custodianof ForeignReserves
BankersBank
Controllerof Credit
Banker tothe
Government
Publicationof Data
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The Reserve Bank of India also has three fully owned subsidiaries:
National Housing Bank (NHB), Deposit Insurance and Credit Guarantee
Corporation of India (DICGC), Bharatiya Reserve Bank Note Mudran
Private Limited (BRBNMPL). The general administration and direction of
RBI is governed by Central Board of Directors consisting of 20 members
which includes 1 Governor, 4 Deputy Governors, 1 Government Official
appointed by the Government of India to give representation to important
stratas in economic life of the country. Besides, 4 Directors are nominated
by the Government of India to represent 4 local boards situated in
Mumbai, Kolkata, Chennai and New Delhi.
1.6.2 Scheduled Banks
Scheduled banks constitute those banks which have been included in the
Second Schedule of the Reserve Bank of India Act, 1934 and these banks
are entitled to borrowing facilities from the RBI. RBI in turn includes only
those banks in this schedule which satisfy the criteria laid down vide
section 42(6)(a) of the Act. On their part, they are required to maintain acertain minimum balance in their accounts with the RBI. They come
within the direct influence of the various credit control measures of the
RBI; and the effects of these measures diffuse through the length and
breadth of the economy.
1.6.3 Non-Scheduled Banks
The banks, which are not covered by the Second Schedule of Reserve Bank
of India, are called as non-scheduled banks. "Non-scheduled banks in
India" means a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".
1.6.4 Commercial Banks
Commercial banks are joint stock companies dealing in money and credit;
the heart of financial system, since they have the ability, in cooperation
with the RBI, to add to the money supply of the nation and create
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additional purchasing power. Commercial banks lending, investments
and related activities facilitate the economic processes of production,
distribution and consumption. Commercial banks have been referred to as
department stores of finance as they provide wide variety of financial
services like transfer of funds, collection, foreign exchange, safe custody,
safe deposit locker, travellers cheque, merchant banking services, credit
cards, gift cheques, etc. in addition to the acceptance of deposits, lending
and investing. The commercial banking structure in India comprises of
(i) Regional Rural Banks
(ii)
Foreign Banks in India(iii) Public Sector Banks
(iv) Private Sector Banks
Development Process of Commercial Banking in India after Independence
Figure 1.4
1949 Re ulation BANKING COMPANIES ACT, 1949
1955Nationalisation
Phase-ISTATE BANK OF INDIA SBI
1959Nationalisation
Phase-IISBI SUBSIDIARIES
1961Insurance Cover to
DepositsDEPOSIT INSURANCE CORPORATION
1968 Social Control NATIONAL CREDIT COUNCIL
1969Nationalisation
Phase-III14 MAJOR COMMERCIAL BANKS
1971 Credit Guarantee CREDIT GUARANTEE CORPORATION
1975 New Rural Banks REGIONAL RURAL BANKS
1980Nationalisation
Phase-IV
SIX COMMERCIAL BANKS WITH OVER
DEPOSITS OF Rs. 200 CRORES
1985Reorganisation of
Banking
1996 New Banks NEW PRIVATE BANKS
1998 Review RE-EXAMINATION
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1.6.5 Co-operative Banks
Farmers in India are scattered all over the country and need short-term
and/or long-term borrowings for agricultural purposes. This need is not
fulfilled by commercial banks which are unsuited for financing
agriculture; land which these farmers can offer to cover bank advances is
not generally accepted as security by commercial banks. Therefore, co-
operative banks best suited for this purpose. Thus, the co-operative
banking sector has been developed in the country to supplant the village
moneylender, the predominant source of rural finance, as the terms on
which he made finance available have generally been usurious anddetrimental to the development of Indian agriculture. Although the co-
operative banking sector receives concessional finance from the RBI, it is
governed by the State legislation.
The co-operative banking structure in India comprises of
(1)Primary Urban Co-operative Banks
(2)Short-Term Lending Oriented Co-operative Banks
(i) Primary Agricultural Credit Societies (PACS)
(ii) Central Co-operative Banks (CCBs)
(iii) State Co-operative Banks (SCBs)
(3)Long-Term Lending Oriented Co-operative Banks
(i) Land Development Banks (LDBs) / State Co-operative
Agriculture and Rural Development Banks (SCARDBs)
1.6.6 Regional Rural Banks
A new category of scheduled banks came into existence in 1975 when 6
Regional Rural Banks (RRBs) came into existence under the Regional
Rural Banks Ordinance, 1975. This ordinance was promulgated by the
Government of India on September 26, 1975. The ordinance was
subsequently replaced by the Regional Rural Banks Act, 1976.
Although co-operative and commercial banks achieved a high reach and
disbursement of credit, there existed a vast gap in the area of rural credit.
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In order to fill up this gap, a new set up of banks, namely, RRBs was
established. RRBs were set up as institutions which combine the local feel
and familiarity with rural problems, which the co-operatives posses and
the degree of business organisation, ability to mobilise deposits, access to
central money markets, and modernized outlook which commercial banks
have. The major objective of setting up RRBs was to develop the rural
economy by providing for the purpose of development of agriculture,
trade, commerce, industry and other productive activities in the rural
areas, credit and other facilities, particularly to the small and marginal
farmers, agricultural labourers, artisans, and small entrepreneurs. The
authorized capital of each RRB is Rs. one crore and the issued capital is Rs.
25 lakh. Of the issued capital, 50 per cent is authorized by the Government
of India, 15 per cent by the concerned state government and the balance,
namely, 35 percent by the sponsor bank. RRBs are required to maintain a
cash reserve ratio of three percent/ they are not liable to pay income tax as
they are deemed to be cooperative societies.
1.6.7 Foreign Banks in India
These banks are registered and have their headquarters in a foreign
country but operate their branches in our country. Foreign banks have
been operating in India since decades or over a century. ANZ Grindlays
has been in India for more than hundred years, while Standard Chartered
Bank has been since 1858. Many other foreign banks set up their branches
in India during the 1990s the liberalisation period.
Some of the foreign banks have set up different entities as subsidiaries in
the form of either non-banking financing companies in the non-financial
sector in India that undertake diverse businesses such as dealing in
securities, leasing and finance, and information and technology. Also,
foreign banks have wholly-owned subsidiaries to run their global business
process outsourcing jobs. A foreign bank can set up a wholly-owned non-
banking subsidiary if it brings in USD 50 million. Unlike the banks there is
no regulation on these NBFCs for setting up branch networks. As per the
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existing norms, a banks exposure to a single corporate entity is restricted
at 15 percent of its capital while for a group it is at 40 percent. The strong
presence of foreign banks in India has benefited the financial system by
enhancing competition, transfer of technology and specialised skills
resulting in higher efficiency and greater customer satisfaction.
In terms of the Press Note No.2 (2004 series) issued by the Ministry of
Commerce and Industry on March 5, 2004, foreign banks will be permitted
to have either branches or subsidiaries not both. They may operate in
India through any one of the three channels viz., (i) branch; (ii) a wholly
owned subsidiary; or (iii) a subsidiary with aggregate foreign investmentupto a maximum of 74 percent in a private bank.
The RBI has prepared a road map for the presence of foreign banks in
India. Under the road map, during the first phase, between March 2005
and March 2009, foreign banks satisfying the eligibility criteria prescribed
by the RBI will be permitted to establish presence by way of selling up a
wholly-owned banking subsidiary or converting the existing branches intoa subsidiary. The wholly-owned banking subsidiary should have a
minimum capital of Rs. 300 crore and sound corporate governance. The
second phase will commence in April after the RBI undertakes a review of
the experience gained and after due consultation with all the stakeholders.
New foreign banks are allowed to conduct business in India after
consideration of the financial soundness of the bank, international and
home country ranking, rating, international presence, and economic and
political relations between the two countries. Foreign banks need to park
20 percent of their profits from India operations with the RBI; and kept as
cash, as unencumbered approved securities or a combination of the two.
1.6.8 Public Sector Banks
These are the banks where majority stake, ownership and control are held
by the Government of India or Reserve Bank of India. Public sector banks
are divided into following categories
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(i) State Bank of India and its Associates
(ii) Nationalised Banks
(iii) Other public sector banks IDBI Bank Ltd.
State Bank of India and its Associates
The evolution of State Bank of India can be traced back to the first decade
of the 19th century. It began with the establishment of the Bank of Calcutta
in Calcutta, on June 2, 1806. The bank was redesigned as the Bank of
Bengal, three years later, on January 2, 1809. It was the first ever joint-
stock bank of the British India, established under the sponsorship of the
Government of Bengal. Subsequently, the Bank of Bombay (established on
April 15, 1840) and the Bank of Madras (established on July 1, 1843)
followed the Bank of Bengal. These three banks dominated the banking
scenario in India, until they were amalgamated to form the Imperial Bank
of India, on January 27, 1921.
An important turning point in the history of State Bank of India is the
launch of the first Five Year Plan of independent India, in 1951. Until thePlan, the commercial banks of the country, including the Imperial Bank of
India, confined their services to the urban sector and were not equipped to
respond to the growing needs of the economic revival taking shape in the
rural areas.
In order to serve the economy as a whole and rural sector in particular, the
All India Rural Credit Survey Committee recommended the formation of astate-partnered and state-sponsored bank and proposed the take over of
the Imperial Bank of India, integrating with it, the former state-owned or
state-associate banks. Subsequently, an Act was passed in the Parliament
of India in May 1955. As a result, the State Bank of India (SBI) was
established on July 1, 1955. This resulted in making the SBI more
powerful, because as much as a quarter of the resources of the Indian
banking system were controlled directly by the State. Later on, the State
Bank of India (Subsidiary Banks) Act was passed in 1959. The Act enabled
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the State Bank of India to make the State-associated banks as its
subsidiaries. These subsidiaries of SBI were
(i) State Bank of Bikaner and Jaipur (SBBJ)
(ii) State Bank of Hyderabad (SBH)
(iii) State Bank of Indore (SBIR)
(iv) State Bank of Mysore (SBM)
(v) State Bank of Patiala (SBP)
(vi) State Bank of Saurashtra (SBS)
(vii) State Bank of Travancore (SBT)
The State Bank of India holds the dominant market position among all
Indian banks. It is the largest commercial bank of India and is ranked as
one of the top banks worldwide. SBI is now planning to position itself as
universal bank catering to the diverse needs of the society. The Table 1.1
hereunder shows the list of the State Bank Group as on March 31, 2009.
Table 1.1
State Bank of India and its Associates as on March 31, 2009
Name of the Bank Year of IncorporationState Bank of India (SBI) 1955
State Bank of Bikaner and Jaipur (SBBJ) 1966
State Bank of Hyderabad (SBH) 1941
State Bank of Indore (SBIR) 1960
State Bank of Mysore (SBM) 1913
State Bank of Patiala (SBP) 1917
State Bank of Saurashtra (SBS) * 1902
State Bank of Travancore (SBT) 1945
Note : * State Bank of Saurashtra was merged with State Bank of India on August 13, 2008.Sources: (i) Annual Reports of various banks for the year 2008-2009.
(ii) Report on Trend and Progress of banking in India, RBI, 2008-2009.
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Nationalised Banks
Nationalised banks dominate the banking system in India. The history of
nationalised banks in India dates back to mid-20th century, when Imperial
Bank of India was nationalised (under the SBI Act of 1955) and
re-christened as State Bank of India (SBI) in July 1955. Before 1969, State
Bank of India (SBI) was the only public sector bank in India.
SBI was nationalised in 1955 under the SBI Act of 1955. Then on July 19,
1960, its seven subsidiaries were also nationalised with deposits over 200
crores. However, the major nationalisation of banks happened in 1969 by
the then-Prime Minister Indira Gandhi. In 1969, fourteen (14) big Indian
joint stock banks in the private sector were nationalised.
In the year 1980, the second phase of nationalisation of Indian banks took
place, in which 7 more banks were nationalised with deposits over 200
crores. With this, the Government of India held a control over 91% of the
banking industry in India.
In all, 28 banks were nationalised from 1955 to 1980.
At present, there are 27 nationalised banks: the State Bank of India and
its seven associates and 19 nationalised banks (New India Bank was
merged with Punjab National Bank).
The major objectives behind nationalisation were to widen the branch
network of banks particularly in the rural and semi-urban areas which, inturn, would help in greater mobilisation of savings and flow of credit to
neglected sectors such as agriculture and small-scale industries. After the
nationalisation of banks there was a huge jump in the deposits and
advances with the banks.
The Table 1.2 shows the list of the nationalised banks of India as on
March 31, 2009.
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Table 1.2
Nationalised Banks of India as on March 31, 2009
Name of the Bank Year of IncorporationAllahabad Bank 1865Andhra Bank 1923
Bank of Baroda 1908
Bank of India 1906
Bank of Maharashtra 1935
Canara Bank 1906
Central Bank of India 1911
Corporation Bank 1906
Dena Bank 1938
Indian Bank 1907
Indian Overseas Bank 1937
Oriental Bank of Commerce 1943
Punjab and Sind Bank 1908
Punjab National Bank 1895
Syndicate Bank 1925
UCO Bank 1943
Union Bank of India 1919
United Bank of India 1950
Vijaya Bank 1931
Sources: (i) Annual Reports of various banks for the year 2008-2009.(ii) Report on Trend and Progress of banking in India, RBI, 2008-2009.
Other Public Sector Banks [IDBI Bank Ltd.]
The Industrial Development Bank of India Limited, now more popularly
known as IDBI Bank, was established as a wholly-owned subsidiary of
Reserve Bank of India. The foundation of the bank was laid down under
an Act of Parliament, in July 1964. The main aim behind the setting up of
IDBI was to provide credit and other facilities for the Indian industry. In
February 1976, the ownership of IDBI was transferred to Government of
India. After the transfer of its ownership, IDBI became the main
institution, through which the institutes engaged in financing, promoting
and developing industry were to be coordinated.
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In April 1990, IDBI set up the Small Industries Development Bank of India
(SIDBI) as a wholly owned subsidiary to cater to specific needs of the
small scale sector. In September 1994, in response to RBI's policy of
opening up domestic banking sector to private participation, IDBI set up
IDBI Bank Ltd., in association with SIDBI. In January 1992, IDBI accessed
domestic retail debt market for the first time, with innovative Deep
Discount Bonds, and registered path-breaking success. It also set up the
IDBI Capital Market Services Ltd., as its wholly-owned subsidiary, to offer
a broad range of financial services, including Bond Trading, Equity
Broking, Client Asset Management and Depository Services.
In August 2000, IDBI became the first All India Financial Institution to
obtain an ISO 9002:1994 certification for its treasury operations. It also
became the first organisation in the Indian financial sector to obtain an ISO
9001:2000 certification for its forex services. It pioneered the setting up of
Asset Reconstruction Company (India) Limited (ARCIL) in 2002 in
association with selected banks and financial institutions. In September
2003, it acquired the entire shareholding of Tata Finance Limited on Tata
Home Finance Limited which has now been renamed as IDBI
Homefinance Limited.
On December 16, 2003, the parliament approved the Indutrial
Development Bank (Transfer Undertaking and Repeal Bill) 2002 to repeal
the IDBI Act, 1964. This act came into force from July 2, 2004. The boards
of IDBI and IDBI Bank Limited took an in-principle decision regarding the
merger of IDBI Bank Limited with proposed Industrial Bank of India
Limited in their respective meetings on July 29, 2004.
The new entity Industrial Development Bank of India was incorporated
on September 27, 2004 and certificate of commencement of business was
issued by the registrar of companies on September 28, 2004. On October 1,
2004, IDBI Ltd. commenced operations as a banking company. The board
of directors of IDBI Ltd. as its meeting held on 20 January 2005 approved
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the scheme of amalgamation, envisaging merging of IDBI Bank Limited
with IDBI Limited.
The government notified the Industrial Development Bank of India as a
bank on April 2, 2004. A bill to convert the institution to a bank was
passed by the parliament. The new bank is now called Industrial
Development Bank of India Limited. A government regulated bank (58 %
Government of India stake) with Other Public Sector Bank status in RBI.
IDBI Ltd., as a DFI (Development Financial Institution) exposed to market
only in 1992 and became government body after merger of IDBI Bank in
Oct 2004, which started working together in April 2005.
1.6.9 Private Sector Banks
Private banking in India was practiced since the beginning of banking
system in India. All the banks in India were earlier private banks. They
were started in the pre-independence era to cater to the banking needs of
the people. In case of private sector banks majority of share capital of the
bank is held by private individuals. These banks are divided into two
major categories-
(i) Old Private Banks which existed with the public sector banks before
the entry deregulation and;
(ii) The New Private Banks that came into existence after the reforms of
1992.
Old Private Sector Banks
For over two decades after the nationalisation of 14 larger banks in 1969,
no banks were allowed to be set up in the private sector. The banks that
existed before 1994 fall under the category of old private sector banks.
These banks are smaller in size and are regional. Interestingly, where the
government owned financial institutions own major equity of the private
banks, the equity share holders of the old private sector banks were
mainly non government bodies.
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Pursuant to the RBI guidelines on entry of new private sector banks issued
in January 1993, the old private sector banks having networth of less than
Rs. 50 crore were advised to attain the level of Rs. 50 crore by March 2001,
and prepare action plans for augmenting capital funds to the level of Rs.
100 crore. Table 1.3 shows the list of old private sector banks of India as
on March 31, 2009.
Table 1.3
Old Private Sector Banks of India as on March 31, 2009
Name of the Bank Year of IncorporationBank of Rajasthan Ltd. 1943Bharat Overseas Bank Ltd. 1973
Catholic Syrian Bank Ltd. 1920
City Union Bank Ltd. 1904
Dhanalakshmi Bank Ltd. 1927
Federal Bank Ltd. 1931
ING Vysya Bank Ltd. 1930
Jammu & Kashmir Bank Ltd. 1938
Karnataka Bank Ltd. 1924Karur Vysya Bank Ltd. 1926
Lakshmi Vilas Bank Ltd. 1926
Lord Krishna Bank Ltd. 1940
Nainital Bank Ltd. 1922
Ratnakar Bank Ltd. 1943
Sangli Bank Ltd. 1948
SBI Comm. & Intl. Bank Ltd. 1993
South Indian Bank Ltd. 1929
Tamilnad Mercantile Bank Ltd. 1921
United Western Bank Ltd. 1936
Notes:(i) Bharat Overseas Bank Ltd. was merged with Indian Overseas Bank on March 31, 2007.
(ii) Lord Krishna Bank Ltd. was amalgamated with Centurion Bank of Punjab Ltd. effective
from August 29, 2007.
(iii)Sangli Bank Ltd. was amalgamated with ICICI Bank Ltd. effective from April 19, 2007.
(iv)United Western Bank Ltd. was amalgamated with IDBI Bank Ltd. effective from
October 3, 2006.
Sources: (i) Annual Reports of various banks for the year 2008-2009.(ii) Report on Trend and Progress of banking in India, RBI, 2008-2009.
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New Private Sector Banks
The Narasimham Committee, in its first report, recommended the freedom
of entry into the financial system. It stated that the RBI should permit the
establishment of new banks in the private sector provided they conform to
the minimum start-up capital and other requirements. The committee also
recommended that there should not be any difference in treatment
between the public sector and private sector and any restrictions in
operation in this regard should be removed. The RBI considered the above
recommendations and allowed banks to be set up in the private sector.
The banks which have been setup after 1990s taking into consideration theguidelines of the Narasimham Committee are referred to as new private
sector banks. The RBI guidelines on entry of new private sector banks
observed that while recognizing the importance and role of the public
sector, there is increasing recognition of the need to introduce greater
competition, which can lead to higher productivity and efficiency of the
banking system. The liberalisation measures attempted to reduce entry
barriers by discarding the earlier licence permit regime. As a consequence,
there were a number of new entrants in the banking business. In 1994,
private sector banking in India received a fillip when the RBI issued a
policy of liberalization to license limited number of private banks, which
came to be known as New Generation tech-savvy banks. These banks are
in the process of reducing promoters stake by raising funds through the
capital market.
Global Trust Bank was, the first private bank after liberalization; it was
later amalgamated with Oriental Bank of Commerce (OBC). Then Housing
Development Finance Corporation Limited (HDFC) became the first to
receive an 'in principle' approval from the RBI to set up a bank in the
private sector. The guidelines for entry of new banks in the private sector
were revised in January 2001; and prescribed an increase in initial
minimum paid-up capital from Rs. 100 crore to Rs. 200 crore. Moreover,
the initial minimum paid up capital shall be increased to Rs. 300 crore in
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subsequent three years after commencement of business. Individual
companies, directly or indirectly are permitted to participate in the equity
of a new private bank upto a maximum of 10 percent, but would not have
controlling interest in the bank. There are at present 8 new private sector
banks the latest entrants are Kotak Mahindra Bank Ltd. in 2003 and Yes
Bank in 2004. The new private sector banks are much larger in size,
operate primarily in metros and are technologically superior. They have
made banking more efficient and customer friendly. In the process they
have jolted public sector banks out of complacency and forced them to
become more competitive.
Table 1.4 shows the list of new private sector banks of India as on
March 31, 2009.
Table 1.4
New Private Sector Banks of India as on March 31, 2009
Name of the Bank Year of IncorporationAxis Bank Ltd. 1994
Centurion Bank of Punjab Ltd. 1994
Development Credit Bank Ltd. 1995#
HDFC Bank Ltd. 1994
ICICI Bank Ltd. 1994
IndusInd Bank Ltd. 1995
Kotak Mahindra Bank Ltd. 2003
Yes Bank Ltd. 2004
Notes:(i) UTI Bank Ltd. was renamed as Axis Bank Ltd. during the year 2006-2007.
(ii) #Converted to private sector bank on May 31, 1995. Started as a Credit Society by the
followers of His Highness the Aga Khan and later converted into Cooperative Bank.
(iii)Centurion Bank of Punjab Ltd. was amalgamated with HDFC Bank Ltd. effective from
May 23, 2008.Sources: (i) Annual Reports of various banks for the year 2008-2009.(ii) Report on Trend and Progress of banking in India, RBI, 2008-2009.
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11..77 TTOOPP TTEENN IINNDDIIAANN BBAANNKKIINNGG CCOOMMPPAANNIIEESS DDUURRIINNGG 22000088--0099
India, since the past few years, has experienced a paradigm shift due to its
competitive stand in the business world. Being a huge market itself, India
became the favorite hunting ground for the companies to explore the
market and grow their business. Banks are the backbone of the global
economy, providing capital for innovation, infrastructure, job creation and
overall prosperity. The presence of a number of top banking companies in
India seconds the thought that the country's market has got enormous
potential.
Numbers count. But they never tell the full story. Traditionally, it was the
norm to rank companies and banks on the basis of their sales or assets
with an assumption the biggest is the best. Today in the era of mega-
mergers, there are still some who swear by this old fashioned thinking.
Others have graduated a bit. Their idea of ranking is to involve a large
number of ratios and indicators, juggle with weightages and finally come
up with relative scores. There is something to be said for this approach. Itis objective and eliminates biases.
Today, banking is no longer about mysterious gnomes juggling millions of
dollars. It is all about service. Convenience, Comprehensive Service and a
Smiling Face are things you cannot put numbers to. Besides, any number-
crunching exercise always throws up some absurdities.
Table 1.5 shows the list of top ten banking companies of India during
2008-2009 on the basis of their performance. Six (6) public sector banks,
three (3) private sector banks and one (1) foreign bank secured place in the
top ten banking companies; that means 60% banks belonged to public
sector, 30% banks belonged to private sector and 10% banks were of
foreign origin.
State Bank of India secured first position and Canara bank stood at tenth
position in the top ten banking companies during 2008-2009. HDFC bank
with second position, Axis bank with third position and ICICI bank with
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Table 1.5
Top Ten Banking Companies in India during the year 2008-2009
Particulars StateBank ofIndia
(No.1)
HDFCBank
(No.2)
AxisBank
(No.3)
Bank ofIndia
(No.4)
PunjabNational
Bank(No.5)
Bank ofBaroda(No.6)
ICICIBank
(No.7)
UnionBank ofIndia(No.8)
Citibank
(No.9)
CanaraBank
(No.10)No. of Offices 11447 1400 786 2934 4323 2916 1408 2569 41 2740
No. of Employees 205896 52687 20624 40155 54780 36838 34596 29014 4795 44090
Business per Employee (in Rs. Lakh) 556.00 446.00 1060.00 833.00 654.92 914.00 1154.00 694.00 1880.10 780.17
Profit per Employee (in Rs. Lakh) 4.74 4.18 10.02 7.49 5.64 6.05 11.00 6.28 45.12 4.97
Capital and Reserves & Surplus 57948 14652 10215 13495 14654 12836 49883 8740 11518 12208
Deposits 742073 142812 117374 189708 209760 192397 218348 138703 51677 186893
Investments 275954 58818 46330 52607 63385 52446 103058 42997 24519 57777
Advances 542503 98883 81557 142909 154703 143986 218311 96534 39920 138219
Interest income 63788 16332 10835 16347 19326 15092 31093 11889 6840 17119
Other income 12691 3291 2897 3052 2920 2758 7604 1483 3582 2311
Interest expended 42915 8911 7149 10848 12295 9968 22726 8076 2429 12401
Operating expenses 15649 5533 2858 3094 4206 3576 7045 2214 2587 3065
Cost of Funds (CoF) 5.85 6.83 5.88 5.79 6.05 5.36 5.97 6.15 3.57 6.75
Return on advances adjusted to CoF 3.83 8.12 4.69 4.00 4.62 3.58 4.09 4.27 9.04 3.69
Wages as % to total expenses 16.64 15.50 9.97 13.90 17.72 17.34 6.62 11.19 17.56 12.14
Return on Assets 1.04 1.28 1.44 1.49 1.39 1.09 0.98 1.27 2.12 1.06
CRAR 14.25 15.69 13.69 13.01 14.03 14.05 13.96 12.01 13.23 14.1
Net NPA ratio 1.76 0.63 0.40 0.44 0.17 0.31 2.09 0.34 2.63 1.09
Source: www. business.mapsofindia.com
7/30/2019 profitability of banking
39/40
38
seventh position, secured place in the top ten banking companies list from
the private sector. Looking to the foreign banks, Citibank the only bank
with ninth position secured place in the top ten list during 2008-2009.
Dun & Bradstreet announced Indias top banks for the year 2009 which is
hereunder:
Dun & Bradstreet, the worlds leading provider of global business information,
knowledge and insight, announced Indias Top Banks 2009that captures the
developments in the banking sector during financial year 2008 and profiles the
scheduled commercial banks (SCBs) in India, consisting of 27 Public Sector Banks
(PSBs), 22 Private Sector Banks and 28 Foreign Banks.
Award Winner Category
Bank of India Overall Best Bank
Bank of India Best Public Sector Bank
Axis Bank Ltd. Best Private Sector Bank
Citibank Best Foreign Bank
Punjab National Bank Priority Sector Lending (Public Sector)
The Federal Bank Ltd. Priority Sector Lending (Private Sector)
ABN AMRO Bank Priority Sector Lending (Foreign Banks)
State Bank of India SME Financing (Public Sector)
ICICI Bank Ltd. SME Financing (Private Sector)
HSBC SME Financing (Foreign Banks)
State Bank of Hyderabad Asset Quality (Public Sector)
The South Indian Bank Ltd. Asset Quality (Private Sector)
HSBC Asset Quality (Foreign Banks)
Bank of Baroda Global Business Development (Public Sector)
ICICI Bank Ltd. Global Business Development (Private
Sector)
State Bank of India Rural Reach (Public Sector)
Tamilnad Mercantile Bank Ltd. Rural Reach (Private Sector)
7/30/2019 profitability of banking
40/40
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